HEDRICK SMITH, Correspondent: [voice-over] This is a story we could tell anywhere in America, but we'll begin here, in Lincoln, Nebraska.

JOHN WINKLEMAN, Nebraska Retirement System: This top sheet says, "Disclaimer and objectives."

HEDRICK SMITH: It's Monday morning. People in their 50s are getting the word on how to prepare for retirement.

JOHN WINKLEMAN: The number one goal that's listed there says, "To provide you with general information on retirement planning and your pension plan benefits."

HEDRICK SMITH: These people have 401(k)-type plans, and they're in for a wake-up call.

JOHN WINKLEMAN: I have some bad news for everyone in the room. Americans are not saving enough money for retirement.
There's a lot of people that are my age that're really going to have a very nasty surprise in about the next 10 years. When I saw how much money I was going to need to maintain my standard of living after I retired, that was quite an epiphany for me that day.

HEDRICK SMITH: For many Americans, it used to be that your employer took care of your retirement.

JOHN WINKLEMAN: What we're trying to say is a lot of the decisions that you're going to have to make are decisions that only you can make.

HEDRICK SMITH: But now the tables have turned. Corporations have stepped back and put the responsibility and much of the cost on individuals.

Prof. ALICIA MUNNELL, Boston College: Our pension system has changed dramatically. People aren't going to have pensions like they used to, where you get a benefit for the rest of your life. People are going to retire basically with 401(k) plans, and that's all.

HEDRICK SMITH: The Boomer generation is finding itself long on life expectancy and short on income.

JOHN WINKLEMAN: How many of you seen somebody retirement age working at McDonald's or Burger King? Now, do you think their retirement goals are to supersize fries? They're there because they have to, aren't they.

Prof. ALICIA MUNNELL: I think this is a crisis in the making. I think 10 or 15 years from now, people who approach their early 60s are simply not going to have enough money to retire.

HEDRICK SMITH: So how did the Boomer generation get into this fix? It's not something that happened overnight. The story unfolded over a couple of decades. A generation ago, our parents could expect that a lifetime of work at a major company would be rewarded with a lifetime pension, but all that is changing.

PAT O'NEILL, Retired Mechanic, United: Well, you got the yogurt and the grapefruit, I guess.

CONNIE O'NEILL: Right, and the tacos and the eggs. That should be enough because you're only going to be gone three days.

PAT O'NEILL: OK, that sounds good.

CONNIE O'NEILL: OK.

HEDRICK SMITH: North of Seattle, Pat O'Neill is headed out for another lonely haul on the highway. His life isn't all that different from most truckers, except for one thing: Pat O'Neill retired three years ago.

HEDRICK SMITH: O'Neill is typical of his generation. He spent his entire career working as an aircraft mechanic for one company, United Airlines.

PAT O'NEILL: I always felt I was doing quite well working for United. I had a work ethic, and I was very loyal to the company. And when they called, I went to work.

HEDRICK SMITH: Back in 2003, when United was trying to cut costs, O'Neill says the company encouraged him to retire.

PAT O'NEILL: They said, "If you old guys want to get out and save your medical insurance for your retirement, it might be a good time to think about leaving'."

HEDRICK SMITH: O'Neill took the advice and retired, counting on a guaranteed $3,000 monthly pension check for the rest of his life.

PAT O'NEILL: I knew I had a good retirement. Check would come every month, and we'd be able to just kick back, enjoy life, no more working midnights, live like a normal human being, as we call it, and spend quality time with each other.

HEDRICK SMITH: But after a while, Pat O'Neill got a jolt. His pension was slashed by a third.

PAT O'NEILL: That was money that I worked for, that I earned, that I felt that I did my job. And my thought is that retirement is sacred. They do not touch that. This is what you sign for. And it's flat wrong for a company to have to go back on their word, as far as your pension. I'm going to be forced to have to stay working because of what United Airlines and the bankruptcy laws, the way it was indicated, said they could do it and got away with it.

HEDRICK SMITH: Pat O'Neill, like more than a million other workers and retirees, is a casualty of corporate restructuring and Chapter 11 bankruptcy. United Airlines filed for bankruptcy in December 2002. In the �90s, United had been flying high, but then low-cost carriers started eating away market share. And after 9/11, United lost traffic and money big-time. Deep in debt, United sought a government loan guarantee. After being rejected, United filed for bankruptcy.

GLENN TILTON, CEO, United Airlines: Everybody knows, I think, Chapter 11 serves a useful purpose. That's why the statute exists. It's there for companies to take advantage of when the occasion presents itself.

HEDRICK SMITH: Glenn Tilton had been hired as United's new CEO just three months earlier. He came with experience in bankruptcy at Texaco.

WILLIAM A. BRANDT, Jr., Restructuring Consultant: The die was cast when Mr. Tilton was hired.

HEDRICK SMITH: [on camera] Why?

WILLIAM A. BRANDT, Jr.: Because Mr. Tilton was brought in to do what the board and previous management didn't have the guts to do.

HEDRICK SMITH: Which was?

WILLIAM A. BRANDT, Jr.: Take it through bankruptcy and clean it up and confront the unions.

GREG DAVIDOWITCH, Pres., Flight Attendants Union, United: Bankruptcy's terrible for the employee. It's an absolutely horrific experience for the people who worked hard to build a company. And through no fault of their own, and as a result of some poor management decisions, it means being forced to negotiate changes to your working conditions, to your terms of employment, with a gun to your head.

ROBIN GILINGER, Flight Attendant, United: The effect of the bankruptcy was stressful. It was not knowing what you were going to lose. In a bankruptcy, as a working group with a union, you know you're going to give back something.

HEDRICK SMITH: And give back they did, making concessions across the board in hopes of saving the main portion of their lifetime pensions for the long run.

GREG DAVIDOWITCH: We take cuts in pay. We take cuts in the area of work rules. We take cuts in the area of health benefits. And we take cuts in the area of pension benefits.

HEDRICK SMITH: In two big rounds of cutbacks, United's four major unions agreed to $3.3 billion in cuts, sacrificing to save the company. But that wasn't enough. United and its banks wanted more. United bankruptcy attorney Jamie Sprayregen.

JAMES H. M. SPRAYREGEN, United Bankruptcy Attorney: At that point in time, it really became clear to everybody that there was going to be no way to exit this bankruptcy case without taking on what I had called the silent elephant in the room. That is, addressing the pension issue.

HEDRICK SMITH: United's pensions had become an elephant-sized issue because for several years, United, like many companies, put little or no cash into its pension trust funds. Instead, United counted on credit for past contributions and overly optimistic assumptions about stock market gains to meet its pension obligations. But after the market plunged, United's pension funds were almost $10 billion in the red.

Through bankruptcy, United shifted the responsibility for paying its workers' pensions to a little known federal agency, the Pension Benefit Guaranty Corporation, the PBGC, which insures failed pension plans.

BRADLEY BELT, Exec. Director, PBGC: When companies get into difficulty, then what they will look to do is say, "Where are all my costs?" and, "Gee, I have a lot of cost here in these so-called legacy promises that I've made to my workers and retirees. I can no longer afford those, now that I'm in financial difficulty. Perhaps I can shift those costs to other parties." And we act as the backstop.

HEDRICK SMITH: The PBGC, financed by premiums from corporations, was set up in 1974 to encourage companies to maintain their pension plans and to ensure that promises to employees were kept.

BRADLEY BELT: We have a little over 800 full-time federal employees. We also have�

HEDRICK SMITH: But those promises turned out to be flimsy because companies were given a lot of flexibility to interpret the pension funding rules under the employment retirement law known as ERISA.

BRADLEY BELT: The funding rules under ERISA are fundamentally flawed. They're broken. They are riddled with loopholes.

HEDRICK SMITH: [on camera] You mean Congress wrote a law that said, "Fund pensions," and then, in effect, gave them a free pass?

BRADLEY BELT: I'm not sure you would characterize it as a free pass, but nonetheless, it does not require, the way it operates, companies to fully fund their pension promises.

HEDRICK SMITH: [voice-over] By exploiting those loopholes, corporate America has created a time bomb. More than 18,000 companies have underfunded their pensions. In five years, several large companies have dumped their pension debts onto the PBGC. Its deficit is now $23 billion and threatens to balloon far larger.

BRADLEY BELT: The level of under funding in the system as a whole, which we estimate at $450 billion today, is substantially more than it was just four or five years ago. It was less than $100 billion.

HEDRICK SMITH: [on camera] Let me get this straight. You're saying that the current corporate pension system in the private sector today is underfunded by $450 billion?

BRADLEY BELT: That's if everybody were to try to terminate their pension plan today.

HEDRICK SMITH: [voice-over] In the end, some warn, taxpayers may have to cover the bill for failed corporate pensions.

JOHN C. BOGLE, Founder, The Vanguard Group: I would say that a $100 billion would be cheap to repair the damage to our retirement system. I think it's going to cost more than that.

HEDRICK SMITH: [on camera] And the taxpayers are going to foot the bill?

HEDRICK SMITH: [voice-over] The risks are compounded by the major bankruptcy reform enacted in 1978. That law gives troubled companies like United a way out of their commitments to employees.

[www.pbs.org: More on bankruptcy and pensions]

Prof. ELIZABETH WARREN, Harvard Law School: In 1978, we adopted a new bankruptcy code in the United States, and a principal part of this was designed to adjust to the new corporation, to find ways to let a corporation that had gotten into financial trouble reorganize itself.

JAMES H.M. SPRAYREGEN, Partner, Kirkland & Ellis: The essence of bankruptcy is that whatever promises the company has made, they can't live up to all of them, and they need to find a way to deal with the fact that they've promised more than they have.

HEDRICK SMITH: Jamie Sprayregen, the lead bankruptcy lawyer for United Airlines, is the most visible edge of an entire new industry that has developed in law firms and Wall Street banks to move companies through bankruptcy.

JAMES H.M. SPRAYREGEN: These days, every large law firm in the country has some sort of bankruptcy practice. We have around a hundred lawyers who do nothing but this. The practice has really moved to be a mainstream part of most big law firms these days.

HEDRICK SMITH: The business has mushroomed as bankruptcy lost its stigma and gained acceptance as a corporate strategy.

JAMES H.M. SPRAYREGEN: I would say that Chapter 11 has become somewhat of a more accepted strategic tool than just companies filing who are about to go out of business, or something like that. And as a result, there is more use of Chapter 11 now than probably 20 years ago.

HEDRICK SMITH: Over time, sophisticated lawyers and financial insiders figured out how to game the bankruptcy law. Their strategy enables companies like United to walk away from costly pension obligations.

HUGH RAY, Bankruptcy Attorney: It wasn't that way some years back. But now it's become a virtual control situation between the management of a company in Chapter 11 and the bankers. They control the playing field, the size, the shape, and generally, the final score.

HEDRICK SMITH: Hugh Ray, a bankruptcy lawyer for more than three decades, gave me an inside look at United's playbook in this fat stack of documents known as the judge's first day orders. First day orders are not actually written by the bankruptcy judge, but by United and its lawyers, hand in glove with its bankers.

HUGH RAY: If you look in the bankruptcy code, you won't see anything about first day orders. It's something that's developed. And the first day order practice is probably the biggest single thing that turned around the practice of bankruptcy to where it is now.

HEDRICK SMITH: First day orders are not written to take care of employees, but to protect the power of management and the loans of bankers.

HUGH RAY: It says right here in the United first day order that the lenders are given superpriority claims� superpriority� not just priority, but superpriority.

HEDRICK SMITH: Bill Repko, who was with J.P. Morgan, led United's bank syndicate.

BILL REPKO: The framers of the bankruptcy code recognized that people who were going to lend money to bankrupt companies were embarking upon a very risky enterprise, and so they created a series of safeguards, one of which moved the bankruptcy loan to the head of the queue to get repaid. And that's called the superpriority.

HEDRICK SMITH: [on camera] It sounds as though, through the first day orders, the whole deal, the whole outcome is pre-cooked.

HUGH RAY: Absolutely, the die is cast.

ELIZABETH WARREN: The question up front about who will have what priorities if this business collapses is where the whole game is won or lost. Ironically, it is the bankruptcy laws that are responsible for much of what has happened here because bankruptcy laws currently say, "Banks, you can take it all," because bankruptcy laws don't leave something on the table for the employees and the retirees.

HEDRICK SMITH: [voice-over] So if bankruptcy doomed United's pensions from day one, why did United take two-and-a-half years to kill its pensions? I asked Jamie Sprayregen.

JAMES H.M. SPRAYREGEN: It may have been, you know, intellectually obvious, but coming up with a process by which to handle adjusting expectations so people would buy into the need to address the pension issue, without it becoming a situation where we would lose what we call the hearts and minds of the employees, was a real challenge and an art.

GREG DAVIDOWITCH, Pres., Flight Attendants Union, United: Ultimately, what we concluded was that management had a very deliberate course of action set out from the beginning of the bankruptcy, which was to roll out demands for concessions over a period of time in an escalating way, in order to bring the employees along without creating a spark that would have led to real labor unrest.

HEDRICK SMITH: [on camera] A strike.

GREG DAVIDOWITCH: A strike.

ELIZABETH WARREN: What it really comes down to is, How much can we take away from the employees before they finally say, "Fine, you take it, but I'm not working here anymore." And no one else will come to work for them, either. That's what corporate reorganization in America has become, "How much less can I give you and still keep you here?"

HEDRICK SMITH: [voice-over] For United, the strategy worked. Last February, after 38 months, it reemerged from bankruptcy, calling itself a vastly more competitive airline. Its top management triumphantly launched the company's new stock on NASDAQ.

HUGH RAY, Bankruptcy Attorney: United is extremely important because it was considered a successful reorganization, in that the airline came out flying. The airline survived. A number of the employees jobs were retained. The routes were retained. And it serves as a good example of how you can reorganize in Chapter 11. In terms of who got what, well, that's another matter.

HEDRICK SMITH: The banks, with their superpriority, got back every penny� plus interest, plus tens of millions of dollars in fees.< br/>
[on camera] Is that payback in cash?

BILL REPKO, Former Executive, J.P. Morgan: Yes.

HEDRICK SMITH: First and foremost?

BILL REPKO: Yes.

HEDRICK SMITH: Now, you got a bunch of fees. Don't you get fees, as well as interest rates?

BILL REPKO: Yes.

HEDRICK SMITH: Collectively, how much do the banks make on these fees?

[on camera] People have said to us that the professional costs run something like $400 million.

JAMES H.M. SPRAYREGEN: Probably in the neighborhood of that, yes.

HEDRICK SMITH: That's a tremendous amount of money. Workers giving up, you know, $3 billion worth of pensions, and it's costing $400 million to get the job done.

JAMES H.M. SPRAYREGEN: I wouldn't call it cheap, but to accomplish what has been accomplished� that's in the range of what happens in restructurings, even in healthy companies, in corporate America.

HEDRICK SMITH: [voice-over] United's senior management got big bonuses to stay on during bankruptcy. Like everyone else, they took a hit on their pensions, but they more than made up for any losses by receiving a grant of $400 million in new stock.

But not everyone's pension was cut.

GREG DAVIDOWITCH: All United employee pensions have not taken a hit. One notable exception is Glenn Tilton, who negotiated as part of his employee contract that a secular pension trust would be established for him, for his retirement security.

HEDRICK SMITH: CEO Glenn Tilton got special protection for his personal retirement benefit, a benefit from his former employer that was bought out by United.

ROBIN GILINGER, Flight Attendant, United: Our current CEO has decided to keep his $4.5 million pension. It was unfair that he was keeping his in his contract and we were having to give ours up.

BILL REPKO: I'm not going there. [laughs] I don't want to go on the record with that one.

HEDRICK SMITH: Is that a good idea, when he's asking other people's pensions to be put on the chopping block?

BILL REPKO: You know, Glenn� Glenn did a great job. I think Glenn's compensation was appropriate under the circumstances.

HEDRICK SMITH: [voice-over] Glenn Tilton declined FRONTLINE's repeated requests to talk about United's bankruptcy. But the company says it is rehiring again, training 2,400 new flight attendants to replace some of the more than 5,000 who left during bankruptcy. United says it saved 55,000 jobs out of 83,000 pre-bankruptcy. Its financial advisers boast that United saved $7 billion a year in costs through bankruptcy. Five billion dollars in cuts came at the expense of employees and retirees. Unions report pension losses for more than 50,000 people because the government's payout formula from the PBGC is lower than United's contracts.

GREG DAVIDOWITCH: We're looking at the abandoning of corporate responsibilities. We're looking at changing the expectation of the middle class with regard to health care and retiree benefits. And it's just not United Airlines. It's happening all across the private sector in America today.

JAMES H.M. SPRAYREGEN, United Bankruptcy Attorney: The restructuring business or the Chapter 11 business is just part and parcel of the American economy. I call it the efficient working of American capitalism.

HEDRICK SMITH: That efficiency took a heavy personal toll on rank-and-file employees, people like 42-year-old flight attendant Robin Gilinger. Gilinger says she lost pay, some benefits and 30 percent of her pension.

ROBIN GILINGER: Because of the bankruptcy, I have gone through great changes in the time I'm away from my family and the time that I have to put to make up for the difference in the loss of pay and benefits. In the late �90s, I was bringing� my yearly income was around $40,000. Now I am barely making the low� in the low thirties, and I'm gone more. I'm gone a lot more.

HEDRICK SMITH: [on camera] And you're making much less?

ROBIN GILINGER: Making that much less, and then having to put away for retirement now because we don't have the pension. That's an even greater strain on the income that comes in because I have to pay for medical and dental now.

HEDRICK SMITH: You got cuts in pay. You got extra expenses for medical and dental. You got insecurity on your pension, and you're going to have to work more years.

ROBIN GILINGER: More years, a lot more years. I mean, it's all that combined, yes.

HEDRICK SMITH: I mean, how do you feel about that? I mean, that's a�

ROBIN GILINGER: It's� it� at times, you want� you have to hold back the tears.

HEDRICK SMITH: What's the hardest thing?

ROBIN GILINGER: Not knowing. The hardest thing is not knowing that I'll be able to retire at United. It's the hardest thing.

HEDRICK SMITH: You mean not knowing if the company will be here?

ROBIN GILINGER: That they will be here. Or not knowing if I'll be able to make the right decisions and be able to invest the ways that this new contribution plan is giving us� is not knowing.

HEDRICK SMITH: So the uncertainty is really what's got you.

ROBIN GILINGER: The uncertainty of not knowing where this is going to take us, this journey.

HEDRICK SMITH: [voice-over] What's happened to Robin Gilinger is that she's been thrown into the brave new world of do-it-yourself 401(k) retirement, along with 40 million other Americans. To understand what the future holds for them, I headed for the Sunbelt� Dallas, Texas, hub for new economy companies.

Outside Dallas, I visited a computer chip plant run by National Semiconductor, an industry leader in employee benefits. I met Brian Conner, the company's benefits manager.

BRIAN CONNER, Benefits Mgr., Natl. Semiconductor: This is one of our largest plants. We also have one in South Portland, Maine. But here in Arlington, Texas, is where we are generating quite a few chips for the cellular phone industry.

HEDRICK SMITH: [on camera] So what have we got here?

BRIAN CONNER: This is level one clean room. Here are some suits we can gown up in.

HEDRICK SMITH: [voice-over] As we toured the plant, Conner told me that like most high-tech companies, National never offered its workforce a traditional lifetime pension. It was among the early firms to latch onto the 401(k).

BRIAN CONNER: We had developed a retirement savings plan as far back as 1975. Over time, as the tax code has changed and legislation has evolved to meet the needs of employees' retirements, we have evolved with that. And then today, it exists as a 401(k) plan.

HEDRICK SMITH: National Semiconductor has been aggressive in promoting its 401(k) with employees, achieving more than 90 percent participation. National went beyond the typical dollar-for-dollar company match.

BRIAN CONNER: And what we found is that if we could provide an additional 50 cents on every dollar to the employees, that they would focus on it more, we could raise our participation rates and we could actually get them to be responsible for their retirement.

HEDRICK SMITH: National makes a special effort to educate its employees on preparing for retirement. This morning, a representative of Fidelity Mutual Funds, its 401(k) plan manager, is leading a workshop, and attendance is mandatory.

FIDELITY REPRESENTATIVE: Now, before I get too deep into this, let me say this� and you know this. You're in the driver's seat of this 401(k), OK? You're the pilot. You're going to make all the decisions. So what we're looking at here� these are just suggestions.

BRIAN CONNER: The responsibility is really on the employee to manage their dollars. What we do is, we provide tools and resources so that they don't have to become a professional money manager.

FIDELITY REPRESENTATIVE: Everybody needs to have an investment strategy.

DAVID BRITT, Natl. Semiconductor Employee: I listen to a lot of financial shows on the radio and television and stuff, and it's where I get most of my information. And I was actually surprised. I really didn't want to come, but I came, and he made a lot of sense. And there's some strategies there that� that I'm going to� that I'm going to start doing.

WILLIE PEARL, Natl. Semiconductor Employee: I've been here 18 years, and when I first got in it, I just put my money in funds and didn't care about it, just walked away and left it there.

HEDRICK SMITH: [on camera] And how'd you do?

WILLIE PEARL: It didn't do too good. I think as I started consulting with other people, I found that you need to start watching your funds and seeing what kind of gains you're getting in.

HEDRICK SMITH: Do you have any concerns about how well people are doing?

BRIAN CONNER: We're concerned every day with that. That's why we provide the company match and the tools and the resources that we provide. When you look at our program, it's much stronger than anybody else in the industry, and so�

HEDRICK SMITH: But you're still concerned.

BRIAN CONNER: We're still concerned.

HEDRICK SMITH: [voice-over] Of course, the test of any 401(k) plan is how well retirees are actually doing, so I went to call on some National retirees living nearby. One was a former customer tech rep, Gil Thibeau.

GIL THIBEAU, Natl. Semiconductor Retiree: Before I jumped into it, I did my own personal research on the computer and talked with other people who were in different plans and what was working best for them.

HEDRICK SMITH: Thibeau is the kind of employee 401(k)s are made for. An engineer with a master's in business administration, he was making more than $90,000 a year. Over 14 years, Thibeau built up a nest egg of $450,000.

GIL THIBEAU: My retirement was a half a million because I got a started late. I would have� if I had started earlier, I would have set my target at a million, but I waited too long, like I think most people do.

HEDRICK SMITH: But not far away, I found another National retiree living a very different kind of retirement. Winson Crabb retired three years ago as a $50,000-a-year equipment technician. During 16 years at National, Crabb says, he faithfully funded his 401(k) plan.

WINSON CRABB, Natl. Semiconductor Retiree: My assumption was that when I got to be 65, well, there would be a large amount of money in there for me to take cash out to put in our bank to utilize for whatever. Well, that didn't work out.

HEDRICK SMITH: But Crabb's wife, Bess, remembers the market dropping sharply in the two years before Crabb retired.

[on camera] So what's your recollection about the maximum amount there was in your husband's 401(k)?

BESS CRABB: A hundred and twenty thousand. That was our goal, and that's what was there.

HEDRICK SMITH: And then the market fell.

BESS CRABB: That's right.

HEDRICK SMITH: So you lost about half of it.

BESS CRABB: Oh, we lost more than that because it went down to $45,000, and we built it back up to $64,000. And then when� the day that he drew out the 401(k), it was $52,000.

HEDRICK SMITH: Fifty-two thousand.

BESS CRABB: Yes.

HEDRICK SMITH: [voice-over] Things got worse. Crabb had some debts to pay, and he got socked with a tax bill when he cashed out his 401(k) in a lump sum.

WINSON CRABB: I just went with the information that I had and thought I was doing the right thing, which I wasn't.

HEDRICK SMITH: [on camera] So what'd you wind up with out of the $52,000?

WINSON CRABB: I think it was $26,000.

HEDRICK SMITH: So how do you manage financially? What do you do?

WINSON CRABB: Well, you do what you have to do, for one thing, you know? You� I had some� a couple jobs in between there, and my wife works.

BESS CRABB: Well, I thought when he retired, it was going to be a lot different, you know, money-wise.

[www.pbs.org: Pitfalls for 401(k) savers]

WINSON CRABB: It was a jolt when we got to counting funds at the end of all that. You know, one day we had to set down and say, "Whew! This is not like what we thought," you know?

HEDRICK SMITH: [voice-over] To stay afloat, Winson Crabb had to sell most of his beloved gun collection for $12,000.

[on camera] You sold some of your guns.

WINSON CRABB: Sure.

HEDRICK SMITH: Was that hard?

WINSON CRABB: Oh, it broke my heart. Yeah. You know, it's been my hobby since I was about 8 years old. I mean, that was like taking a part of my liver out or something, you know?

HEDRICK SMITH: [voice-over] I was curious. Why would Thibeau and Crabb have such wildly different results with the same 401(k) plan? In Dallas, I found the man with the answer, a corporate benefits consultant with 50 years of experience named Brooks Hamilton.

Originally, Hamilton had been a big believer in the magic of 401(k)s, but by the 1990s, he began to notice troubling differences among employees in the 15 corporate 401(k) plans that he was running.

BROOKS HAMILTON, Corporate Benefits Consultant: They were all large plans with $100 million, $200 million dollars in the plan, and 1,000, 2,000 participants or more, so these were big plans. And they were scattered around geographically, some up East and some on the West Coast.

HEDRICK SMITH: Hamilton dug deep into his 401(k) records, analyzing investment yields for every single worker in every single plan.

BROOKS HAMILTON: We saw the same thing over and over. Say the bottom 20 percent had an investment return for the year � for the year � of 4 percent. The top 20 percent would be anywhere between 5 and 7 times that number.

HEDRICK SMITH: [on camera] Like 30 percent.

BROOKS HAMILTON: Yeah, 30 percent. Right.

HEDRICK SMITH: [voice-over] According to Hamilton, the huge differences between Thibeau and Crabb reflected a far larger problem.

BROOKS HAMILTON: In every case, the 20 percent at the top not only had the highest investment income � like 30 percent or whatever � they also had the highest average annual pay, whereas the bottom 20 percent not only had the lowest investment income, 4 percent, they had the lowest average annual pay.

HEDRICK SMITH: [on camera] So what you're saying is the best paid people, the richest people are getting richer, and the middle class workers are falling further behind.

BROOKS HAMILTON: Yes, that's exactly what I'm saying. I label this "yield disparity." I just coined the term. I thought� we have a yield disparity that is a financial cancer in this � in our great, beautiful 401(k) movement. And I had never seen it before, but it was everywhere I looked.

HEDRICK SMITH: What do you mean, a financial cancer?

BROOKS HAMILTON: It would destroy the opportunity for ordinary workers to retire in dignity. They couldn't get there from here.

HEDRICK SMITH: [voice-over] It's a huge problem. Half of America's workers are not covered by any retirement plan. Forty percent are enrolled in some 401(k)-style plans, and according to the latest report from the Federal Reserve, the average family's account balance is only $29,000.

And it's not just average Americans who have trouble making a 401(K) work well. Even the experts have trouble.

Prof. ALICIA MUNNELL, Boston College: I have made virtually every mistake that I look out there and see other people doing. It's� we live busy, complicated lives. Saving for retirement is a really hard thing to do.

HEDRICK SMITH: [on camera] What's gone wrong?

Prof. ALICIA MUNNELL: Everything. Everything has gone wrong. The individual has to make a choice every step along the way. The individual has to decide whether not to join the plan, how much to contribute, how to allocate those contributions, how to change those allocations over time, decide what to do when they move from one job to another, think what to do about company stock. And then the hardest thing, which we haven't even gotten to, is what are they going to do when they get to retirement and somebody hands them a check? How do you figure out how to use that over your retirement span?

HEDRICK SMITH: So what you're suggesting is all this individual control may not be such a good idea.

Prof. ALICIA MUNNELL: Well, the numbers aren't very encouraging.

HEDRICK SMITH: [voice-over] For a hard look at the numbers, I visited a leading Washington think tank on pensions and retirement issues, the Employee Benefit Research Institute.

HEDRICK SMITH: Jack Vanderhei is a research fellow. At his fingertips, Vanderhei has a huge database on employee benefits.

JACK VANDERHEI: Right now, we have data on 16.5 million participants from about 45,000 different 401(k) plans.

HEDRICK SMITH: [on camera] Wow, that's a lot. OK, when you look at that data, what do you find out about the generation that's just about to retire, folks between, like, 60 and 65? How much have they saved in those 401(k) plans?

JACK VANDERHEI: On average, it turns out that approximately three times what they have as their final salary is what their account balances are for those currently on the verge of retirement.

HEDRICK SMITH: So if we're looking here at people making $40,000 to $50,000 a year, they've got $120,000, $150,000 in their 401(k).

JACK VANDERHEI: Right.

HEDRICK SMITH: So will� how many years will this cover them?

JACK VANDERHEI: Seven to eight years. After that, you basically have nothing but Social Security.

HEDRICK SMITH: And what's life expectancy if you retire at 60 or 65?

JACK VANDERHEI: Oh, around 17 years.

HEDRICK SMITH: So we're talking a gap eight or nine years, where these folks are going to be just down at Social Security level.

JACK VANDERHEI: For those that don't have anything else other than Social Security and these 401(k) plans, that would be correct.

HEDRICK SMITH: [voice-over] What workers need to save up, says Vanderhei, is more like eight times their average pre-retirement salary. For that, you need to sock away a lot more than what most people are doing.

[on camera] So whatever you're doing, you're saying 14 or 15 percent a year is what you're going to need to be putting in 30 years in a row.

HEDRICK SMITH: And you're talking about the middle of America. You're talking�

JACK VANDERHEI: Absolutely.

HEDRICK SMITH: And they're in for a rough ride.

JACK VANDERHEI: Very rough.

HEDRICK SMITH: [voice-over] The biggest problem is low participation. Masses of ordinary workers are left without any 401(k) plans. But even those who get offered one typically do not put in enough money.

Prof. ALICIA MUNNELL: Between 25 and 30 percent of people who could join these plans don't join the plans. Of the possibility of contributing the maximum, less than 10 percent of people contribute the maximum.

HEDRICK SMITH: Another serious problem is what's called "leakage." Too often, the 401(K) savings account becomes the rainy day account.

Prof. ALICIA MUNNELL: Half the people, when they move from one job to another, take the money out of their 401(k). Now, they may even use it for something good. They may use it for further education, or they may use it as down payment for a house. But it means it's not there when they come to retirement.

HEDRICK SMITH: Add to that the huge difficulties ordinary people have in doing their own investing.

BROOKS HAMILTON: I used to ask the CEO, CFO of my major clients, often in an environment, a conference room� some young employee would bring in coffee and all, and as they would be leaving, I would ask the CEO, "Fred, let me ask you, would you allow that employee to direct the investment of your account in the 401(k) plan?" And they always thought I was some kind of idiot. It's kind of like, "Don't they teach you anything down in Texas, Brooks? Of course not. I wouldn't let them touch my account with a 10-foot pole." And I'd say, "Well, but you force them to manage their own, and they are running their money into the ground."

HEDRICK SMITH: The roots of the problem, some say, lie in how the 401(k) system was born in Washington. Originally, it was not set up to have millions of us managing our own retirement.

Prof. ALICIA MUNNELL: 401(k) plans were originally introduced as supplemental plans. No one ever said, "Oh, let's end these traditional pensions and replace them with 401(k) plans."

HEDRICK SMITH: The 401(k) first emerged as an arcane sub-paragraph in the fine print of the tax code in 1978. Intended as a technical fix to protect a tax shelter for executives at Kodak and Xerox, no one expected it would lead to a retirement revolution.

Prof. TERESA GHILARDUCCI, Notre Dame University: The 401(k) provision came about like lots of changes in the tax code comes about, which is a company has a particular problem and a particular issue, particular to them, they come to Congress, to their senator, and they start� they start asking for their loophole.

HEDRICK SMITH: Under more corporate prodding, the Internal Revenue Service ruled in 1981 that savings from regular salary checks also qualified for the 401(k) tax shelter, and that opened the floodgates.

BROOKS HAMILTON: It electrified the industry. It electrified guys like me. It electrified the professional infrastructure of the benefit industry because it was, "My God, do you realize a worker can now deduct savings for retirement?"

HEDRICK SMITH: The pitch to corporations was that the 401(k) would save them big money. The new 401(k)s would cost them less than half as much as the old lifetime pensions, which cost companies about 6 to 8 percent of payroll.

BROOKS HAMILTON: And the same company, let's say, terminated their pension or froze it or abandoned it or whatever, put in a 401(k) plan. They probably were putting in 2 or 3 percent of payroll because not everybody was in the plan.

HEDRICK SMITH: And the pitch to employees was ownership� Take charge of your future, own your own savings plan, get free money from your employer.

BROOKS HAMILTON: It had a lot of sex appeal. And it was power to the people and it empowered the worker. And that's the way it was presented and that's the way it was sold.

FIDELITY TELEVISION COMMERCIAL: Maybe you like high tech, health care or the electronics sector.

HEDRICK SMITH: The 401(k) rocketed upward on the powerful convergence of a roaring bull market, computer software which spat out daily stock quotes for individual accounts and the marketing muscle of mutual funds.

FIDELITY TELEVISION COMMERCIAL: Call 1-800-FIDELITY.

DAVID WRAY, Profit Sharing/401(k) Council: All of us in America looked at that booming stock market. We wanted to be part of that. The 401(k) participants were exactly the same way. And so there was just a� a true boom in interest in 401(k)s as a way to invest in equities.

FIDELITY REPRESENTATIVE: They're going to charge you for this service. There is a fee.

HEDRICK SMITH: What got lost in the euphoria was the enormous shift in who was now paying for retirement. A Labor Department study documented how the burden had shifted since the heyday of lifetime pensions.

BROOKS HAMILTON: Of all contributions being made, the worker put in 11 percent. The company put in 89 percent. That was in �74. Fast forward to 2000, and the same source of data, the Department of Labor, the same� said that of all contributions being made today, workers are putting in 51 percent, companies 49 percent of all the contributions. Since �74 to 2006, there's been a cost shifting of 40 percent from contributions made by the employer to contributions made by the employee.

JOHN ROTHER, Policy Director, AARP: For Boomers who are middle-income Boomers who have only 401(k)-type plans, that don't have the traditional lifetime pension, they're at risk. And I'm alarmed by what I see because they are not prepared to face the length of their retirement. They're not prepared to face the expenses they will likely face. This is a generation that may well end up depending on Social Security alone. That's not going to be very satisfactory to them or to us, as a society.

HEDRICK SMITH: [on camera] Big drop in standard of living.

JOHN ROTHER: A big drop in the standard of living for many people who thought of themselves as middle class.

Prof. ALICIA MUNNELL: These 401(k) plans were initially supplementary plans to these basic pensions, so it was fine if you left all of the decisions up to the individual. What's happening is the old-fashioned pensions have disappeared, and so this plan that was sort of a supplementary plan is now everybody's basic plan. And it's so poorly designed because it was never designed for� to be the mainstay of people's retirement.

[www.pbs.org: 401(k) benefits and hazards]

HEDRICK SMITH: David Wray, head of the Profit-Sharing 401(k) Council and a long-time 401(k) booster, argues against a rush to judgment on the 401(k).

DAVID WRAY: The reason is because most people haven't been in the system that long. I mean, we talked about the real explosion in the system is in the early �90s. These people haven't been in the system long enough to take advantage of that long-term compounding. I mean let's face it, older Baby Boomers are really going to have to put the savings pedal to the metal. And that's why, you know, we have special programs so they can contribute more to the programs and stuff. But they weren't in the system long enough.

HEDRICK SMITH: But in my travels, i had found evidence that it may not be just a question of time. Back at that workshop in Nebraska, I had learned that Nebraska had 40 years of experience with a 401(k)-style defined contribution plan for state employees.

Nebraska is a unique laboratory. For 40 years, it has run two different kinds of retirement plans side by side, some employees,covered by the traditional lifetime pensions, others by a 401(k)-style defined contribution plan. Both were top-notch plans, with mandatory participation and contribution levels, and a 7 percent employer match. But the state was still concerned.

ANNA SULLIVAN, Dir., Neb. Retirement System: The state legislature commissioned what is called a benefit adequacy study. They wanted to have a consultant look at all of the plans and determine the adequacy of the benefit that the state was providing.

ANNA SULLIVAN: We've had experience since the mid-�60s, and the people retiring from our defined contribution plan do not have the kind of an account balance� which is basically what a defined contribution plan gives them, an account balance� it isn't sufficient for them to live on in retirement. It's just not adequate.

HEDRICK SMITH: [on camera] Forty years hasn't done the trick. It's not a matter of time.

ANNA SULLIVAN: I don't believe it's a matter of time. I believe it's a matter of understanding what it takes for the employee to take a hold of this and utilize it and earn the kind of return that they need to have. You're talking people who are not investment professionals.

HEDRICK SMITH: [voice-over] After the study, Nebraska ended its 401(k)-style plan for new employees and allowed old 401(k) participants to shift to the lifetime pension plan.

HEDRICK SMITH: David Wray is doubtful. He asserts that much of corporate America has already abandoned lifetime pensions as too expensive.

DAVID WRAY, Profit Sharing/401(k) Council: In a global competitive environment, that's� you� you can't do that. You have to have the financial flexibility to spend that money on new redesign of some product, not putting money into a benefit plan.

FIDELITY REPRESENTATIVE: Any questions about the basics of the plan? I want to try to simplify this for us.

HEDRICK SMITH: But Wray concedes that the 401(k) system must be reformed.

DAVID WRAY: Well, I� I don't shy away from the fact that there are flaws that need to be fixed. I shy away from a representation that the system is fatally flawed because it is not. The system is not fatally flawed. Like any other system, you have to make it work and you have to learn and improve it.

FIDELITY REPRESENTATIVE: They're adding a new feature to your plan. It's called "retirement plan manager." It's where you're handing the reigns over to Fidelity.

HEDRICK SMITH: But David Wray says the path to real reform is putting employers firmly in control of 401(k) plans.

DAVID WRAY: The system is going to where employees do nothing, and good things happen. Money is going to be taken from their paycheck and put into these programs. And then it's going to be automatically invested in a� in an appropriate diversified program on their behalf.

HEDRICK SMITH: [on camera] So it sounds to me that if you move to a system where the employer is, by default, putting employees into the 401(k) plan, determining their level of participation and then managing the money, we're virtually back to a defined benefit plan, except that the employees are footing 50 percent of the bill, and they've got all the risk at the far end, instead of the employer.

DAVID WRAY: Well, I� I think� I think people still like the ownership. But the question is, do they really want all that choice? Do they want all that responsibility? And what we're finding is they don't. They want the employer to do that for them. And that's where the system is going, back to where it was in the old days,

HEDRICK SMITH: [voice-over] For most workers, Wray's reforms haven't happened yet and may never happen. What's more, some experts question whether the 401(k) system is capable of carrying the burden of being America's retirement system.

BROOKS HAMILTON: I regret the fact that our strategy now, our retirement income strategy in major companies, is the 401(k) because I think it� it may be fatally flawed. I know that there's a growing number of people who feel it's not fixable, that it cannot be fixed.

JOHN BOGLE, Founder, The Vanguard Group: The whole retirement system, in fact, in the country is in, I think, very poor shape, and it's going to be the next big financial crisis in the country, I honestly believe. I don't see that the� our administration or our Congress is giving it the attention that it really has to have. I don't think anybody has a crisis kind of an attitude toward this.

HEDRICK SMITH: Meanwhile, millions of ordinary Americans are facing the crisis of retirement on their own, and the options are few. Pat O'Neill is still behind the wheel.

PAT O'NEILL, Retired Mechanic, United: I'm not unique. There's people all across this land that're in the same boat I'm in� didn't see it coming, and they just really� their back is against the wall. So they got to do what they've done all their life, is they got to go to work.

HEDRICK SMITH: Winson Crabb is leaving Texas for a new job in another computer chip plant.

WINSON CRABB, National Semiconductor Retiree: I'm going to New Mexico to work in a chip plant again as a safety officer.

HEDRICK SMITH: [on camera] But here you are, 68, retirement years, heading off to a new job, like a young guy at 28 -

WINSON CRABB: Yeah.

HEDRICK SMITH: [voice-over] And Robin Gilinger is worried about what lies ahead.

ROBIN GILINGER, Flight Attendant, United: I feel very uneasy about where I'm going to be in 20 years. And I'm afraid that I'm going to end up having to work my golden years doing things that I didn't necessarily want to be doing.

Prof. TERESA GHILARDUCCI, Notre Dame University: Baby Boomers will be facing a very different kind of retirement life than their parents. The research shows that they might be able to keep the same amount of income, you know, relative to what they earned, so the middle class Baby Boomer may also maintain their middle class lifestyle into retirement. But there's one big difference. The only way the can do it is if they work. The only source of income to retirees � and I understand the irony in what I'm just going to say. The only increasing source of income to retirees is from work.

HEDRICK SMITH: [on camera] Working longer?

Prof. TERESA GHILARDUCCI: Working longer. So what is the meaning of the word retirement, if the only way you can live in retirement is to work? The answer is, there is no meaning to retirement anymore. We're now shifting from lifetime pensions to lifetime work. It's the end of retirement.

ANNOUNCER: Explore whether you can afford to retire at our Web site, study Frequently Asked Questions on retirement planning, how much to save and how to do it wisely, watch a video report on one corporate bankruptcy's impact on pensions and health benefits, read the interviews, more about the workers profiled, then watch the program again on line, join the discussion and share your own retirement story at pbs.org.
Next time on FRONTLINE: These women have been torn from their lives, taken from their families and sold into slavery. They are victims of a multi-billion-dollar international business that traffics an estimated 500,000 women a year. FRONTLINE goes undercover to tell the tragic story of the sex trade next time on FRONTLINE.

FRONTLINE's Can You Afford to Retire? is available on videocassette or DVD. To order, call PBS Home Video at 1-800-PLAY PBS. [$29.99 plus s&h]

Funding for FRONTLINE is provided by the Park Foundation, committed to raising public awareness, with additional funding for this program from the Nathan Cummings Foundation.

FRONTLINE is made possible by contributions to your PBS station from viewers like you. Thank you.